Is Fastly A Good Metaverse Stock? Discussing 2025 Guidance (NYSE:FSLY) | Seeking Alpha
Steve Jennings/Getty Images Entertainment shareholders of fastly (nyse:fsly) have seen it all. the stock was a pandemic winner, buoyed in large part by its meme-stock status. That meme status disappeared when the company lost much of its TikTok business, and overall growth slowed rapidly thereafter. the stock is now trading at about the same price as its initial public offering, and investors may wonder if it’s a good metaverse stock. I discuss the valuation and long-term outlook with the stock trading at these low levels. Reading: Fastly metaverse fsly priced its initial public offering at $16 per share in 2019 and closed its first day of trading 50% higher at $23.99 per share. The optimism made sense, as content delivery networks offer a way to invest almost directly in the growth of the internet. That optimism eventually turned to euphoria when the stock peaked at just under $129 a share in late 2020. It’s been downhill from there. Priced at $18 per share, the stock now trades barely higher than its IPO price in spite of three years’ worth of developments. Is the stock a buy? We can better see the financial evolution by analyzing the results of several quarters. below, we can see that fsly revenue grew 26% sequentially and 49% year over year in the second quarter of 2020. that growth has slowed to 12.7% sequentially and 18.3% year-over-year. % year over year as of last quarter. Fastly 2021 Q4 Supplemental See also : Why Do Landlords Require Renters Insurance | State Farm® gross margin has been trending in the wrong direction. gross margin peaked at 60.2% in the second quarter of 2020 and stood at 50.9% in the last quarter. What’s more, the company has struggled with profitability as it is burning through a lot of cash and is not profitable even on an adjusted EBITDA basis. these financial results are unusual considering the sustained growth and strong cash flows seen in top dog cloudflare (net). what is the problem? We can see below that while the dollar-based net expansion rate was 121% last quarter, the net retention rate was only 107%. furthermore, customer growth has been very slow, at just 20.6% year over year. Fastly 2021 Q4 Supplemental Looking forward, fsly expects revenue to plateau sequentially in the next quarter at $100 million. fsly expects full-year revenue growth to be just 15.7%. Fastly 2021 Q4 Supplemental The slowing growth rate is a red flag considering the network has been on target for 42% revenue growth despite having a significantly larger revenue base. See also : Financial ties between Robinhood and funds shorting GME fall under scrutiny This is an interesting question. While fsly does not invest directly in the metaverse, its content delivery network will benefit as more data is transmitted online. So, in a sense, when fsly invests in your business, you’re also investing in the underlying infrastructure of the metaverse. That said, the company doesn’t seem to be investing directly in the metaverse. fsly is possibly a metaverse stock considering the metaverse will likely rely heavily on cdns like fsly. That said, roundhill’s ball metaverse etf (metv) no longer believes fsly to be a metaverse stock. As of June 30, 2021, Fsly held a 3.9% position in ETF. As recently as December 31, 2021, fsly held a 2% position in the etf. As of today, fsly is no longer a position at the etf. The ETF has a net position, but that share represents only 1.3% of total assets. it’s possible that the etf administrator wanted to focus more on names that are directly related to the metaverse. Consensus estimates call for revenue growth to slowly accelerate through 2025, where it would peak at 30%. Seeking Alpha Those estimates seem aggressive, but there’s a reason why analysts are so optimistic. At the 2021 Q3 call, management targeted $1 billion of revenue by 2025. I note that consensus estimates call for only $730 million of revenue by then. To reach $1 billion in revenue, fsly would need to grow at a 35% CAGR from 2023 to 2025. Management stated that it can achieve this goal by investing more aggressively in developers, which should allow it to better compete against the competition. When asked whether the growth would be organic or inorganic on the same conference call referenced, management did not give a definitive answer, although it noted that they had no immediate acquisition plans. My opinion is that the guidance for 2025 seems very ambitious, if not too optimistic. it’s one thing when tech peer servicenow (now) guides for $15bn of revenue by 2026, which would imply minimal slowing growth over the next five years. but fsly is guiding for growth to accelerate significantly and maintain that acceleration through 2025. i understand any motivation to believe that guidance. the shares are trading cheaply at 5.4x sales, much lower than the 38x net sales. Assuming the company can reach 30% long-term net margins, the stock trades with only 18x long-term earnings power and continues to grow revenue at a double-digit rate. if the company can achieve the projected 35% annual growth rate, then the multiple would likely expand to the 20x sales level (net operations to 38x sales vs. 42% growth) and the stock would be a home run over earnings. current prices. However, there are good reasons to be skeptical. Why should investors believe that fsly will be able to achieve accelerated growth from 15.7% in 2022 to 35% next year? in my opinion it seems much more likely that competitors like net will take market share aggressively, making it difficult for fsly to even maintain its 15.7% growth rate in 2023. it’s much easier to maintain the status quo (like at net) which is to transform the underlying software (as in fsly). the stock is likely to deliver incredible returns if management can deliver on guidance. however, what if they don’t? I was able to see stock trading at up to 1.5x price-to-earnings growth ratio (‘peg ratio’), which arguably may be bullish considering the slow growth rate and uninspiring margins. the stock offers just under 50% upside over that target, which seems inappropriate considering the risk-reward profile in my opinion. fsly’s balance sheet isn’t terrible, as he had $1.1 billion in cash & marketable securities versus $933 million of long-term debt. that debt consists primarily of 0% convertible notes due 2026 with a conversion price of $102.80 per share. Due to the high conversion price, this debt essentially acts as 0% debt for the next four years. The company spent $38 million in cash in 2021 and so should have enough cash on hand for some time, but if profit margins don’t improve in the next few years, the company may have to address maturing 2026 by issuing high yield debt, which would substantially increase the risk profile of the business. that explains the simple bearish thesis of tech stocks like fsly: if it’s winning, then underperformance can be tolerated for many years, but if it’s losing, then underperformance can lead to debt, dilution, and the stock eventually becoming in financial solvency. concern. I am skeptical that management will achieve 2025 guidance and stocks are not priced low enough to take that leap of faith. I rate the actions as “keep” or “avoid” as there are better opportunities in other parts of the sector. Source: https://amajon.asia
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